A lower rate isn’t automatically a good deal. Whether refinancing pays off depends on the costs, how long you’ll stay and what you’re trying to achieve.
Refinancing means taking out a new mortgage to pay off the old one. People do it to lower the rate, change the loan term, switch from an adjustable to a fixed rate, remove mortgage insurance or take cash out.
Work out the break-even point
Refinancing comes with closing costs, often several thousand dollars. The key calculation:
Break-even (months) = total refinancing costs ÷ monthly saving
Example: costs of $6,000 and a monthly saving of $200 give a break-even of 30 months. If you plan to stay in the home for at least the next three years, the refinance should pay off; if you might move in two years, it probably won’t.
Watch the term
Lowering your payment by starting a new 30-year loan can increase the total interest you pay, because you’re stretching repayment out again. If you’re 8 years into a 30-year loan, consider a 20- or 15-year refinance, or keep paying the old amount on the new loan.
Rate-and-term or cash-out
- Rate-and-term refinance: changes the rate or term without taking extra money out.
- Cash-out refinance: borrows more than you owe and gives you the difference in cash. It usually costs a little more and turns home equity into debt secured by your home.
Before taking cash out, compare it with a home equity loan or line of credit, which leaves your first mortgage rate untouched. The differences are covered in HELOC or home equity loan.
Other reasons to refinance
- Leaving an ARM before its rate adjusts, as discussed in fixed versus adjustable rates.
- Dropping FHA mortgage insurance by moving to a conventional loan once you have enough equity.
Shop it like a purchase
Get several Loan Estimates on the same day and compare the rate, points and fees, the same way you would when buying. Ask your current servicer too; it may offer competitive terms.
The short version
- Refinancing replaces your current mortgage with a new one, with new closing costs.
- Divide total costs by the monthly saving to find how long it takes to break even.
- Restarting a 30-year term can lower the payment but raise total interest.
Readers also ask
How much do I need to save on the rate for a refinance to be worth it?
There’s no fixed rule. What matters is whether the monthly saving recovers the costs well before you expect to move or refinance again.
Can I refinance with little equity?
Some government programs offer streamlined refinancing, such as for existing FHA and VA loans. Conventional refinances usually need more equity.
Does refinancing hurt my credit?
There’s a small, temporary effect from the credit check and the new account. Shopping lenders within a short window limits it.
This guide is general information about U.S. mortgages, not financial, tax or legal advice. Loan terms depend on the lender and on your credit, income and property, so confirm the details with your lender, and see consumerfinance.gov for official guidance.
